iar systems set for a strong q4highlight the market opportunity within secure embedded systems. a...

IAR SYSTEMS

Set for a strong Q4 We expect another strong quarterly report (due on 13 February at 13:30 CET), with little change in underlying demand since Q3, driving organic growth of 8% in Q4e and an EBIT margin of 30.4%. We believe 2019 should mark a pivotal year for IAR Systems, to leverage and maintain its head start in offering secure embedded systems. With largely unchanged earnings estimates, we reiterate our fair value of SEK280–350.

2019 set to be a pivotal year for IAR Systems. 2019 could potentially be a tipping

point for IAR Systems with: 1) the commercial launch of ‘Security from Inception’; 2)

support for Amazon FreeRTOS; and 3) RISC-V partnerships set to hit the market. We

believe that IAR Systems and Secure Thingz will increase investor confidence in its

delivery capability in 2019, thus manifesting the growth opportunity in securing IP and

device entity in the programming of processors. If it is able to leverage, defend, and

maintain its leading position in this emerging market, we believe there is a potential for

shareholder value creation beyond our fair value.

We look forward to another strong report. IAR Systems’ Q4 looks set to have

continued the strong trend established in Q2, with our forecasts suggesting 15% sales

growth YOY (organic +8% and FX +7%), equating to sales of SEK101m and EBIT of

SEK31m (EBIT growth of 14% YOY) and corresponding to a margin of 30.4% – down

c20bp YOY. Market share gains and focus on large strategic customers are set to drive

sales growth, but we forecast a slight margin contraction YOY due to continued hiring of

software engineers driving an opex step-up (upSEK3m QOQ). We believe investors are

willing to overlook this as long as the growth opportunity, particularly in Secure Thingz,

remains on track. We expect a 2018 DPS of SEK5.00.

Fair value maintained at SEK280–350. We believe the market is currently ascribing too

little value to IAR Systems’ growth initiatives (Secure Thingz, RISC-V, and Amazon

FreeRTOS). The lack of investor (and analyst) focus presents a particularly attractive

long-term value opportunity in our view. Our estimates correspond to a 2019e P/E of

30x, an EV/EBIT of 22x, and an EV/sales of 7x.

IARB versus OMXS30 (12m)

Source: Factset

Note: Unless otherwise stated, the share prices in this note are the last closing price.

This report has been commissioned

and paid for by the company, and is

deemed to constitute an acceptable

minor non-monetary benefit as

defined in MiFID II

EQUITY RESEARCH – SPONSORED RESEARCH 16 January 2019 Research report prepared by DNB Markets, a division of DNB Bank ASA

Information Technology

Q4 preview

This report was completed and disseminated at 17:56 CET on 16 January 2019

160180200220240260280300

jan mar maj jul sep nov jan

IAR Systems OMXS30 (Rebased)

SUMMARY

Share price (SEK) 241

Tickers IARB SS, IARb.ST

CAPITAL STRUCTURE

No. of shares (m) 14.0

No. of shares fully dil. (m) 14.0

Market cap. (SEKm) 3,359

NIBD adj end-2018e (SEKm) -108

Enterprise value adj (SEKm) 3,252

Net debt/EBITDA adj (x) -0.77

Free float (%) 100

Source: Company, DNB Markets (estimates)

NEXT EVENT

Q4 2018 13/02/2019

ESTIMATE CHANGES (SEK)

Year-end Dec 2018e 2019e 2020e

Sales (old) 393.7 465.3 542.5

Sales (new) 383.3 459.1 544.2

Change (%) -2.6 -1.3 0.3

EPS (old) 6.57 7.90 10.35

EPS (new) 6.76 8.04 10.40

Change (%) 2.8 1.8 0.5

Source: DNB Markets,

Year-end Dec 2014 2015 2016 2017 2018e 2019e 2020e

Revenue (SEKm) 256 312 328 345 383 459 544

EBITDA adj (SEKm) 64 98 113 127 140 182 241

EBIT adj (SEKm) 53 83 101 107 118 150 200

PTP (SEKm) 54 83 100 106 112 148 196

EPS rep (SEK) 3.34 5.02 6.18 6.33 6.59 8.04 10.40

EPS adj (SEK) 3.34 5.02 6.18 6.33 6.76 8.04 10.40

DPS (SEK) 0.00 5.00 7.00 5.00 5.00 5.00 5.50

Revenue growth (%) 8.3 21.9 5.4 5.1 11.1 19.8 18.5

EBITDA growth adj (%) 25.7 54.6 15.2 12.4 9.7 30.7 32.3

EPS growth adj (%) 59.2 50.2 23.0 2.6 6.6 19.0 29.4

EBITDA margin adj (%) 24.9 31.5 34.5 36.9 36.4 39.7 44.4

EV/Sales adj (x) 3.42 5.80 7.63 6.58 8.57 7.07 5.90

EV/EBITDA adj (x) 13.8 18.4 22.1 17.8 23.5 17.8 13.3

EV/EBIT adj (x) 16.5 21.7 24.9 21.1 27.8 21.6 16.0

P/E adj (x) 22.4 29.9 33.4 29.8 36.0 29.9 23.1

P/Book (x) 3.27 6.51 9.31 8.22 5.87 5.41 4.87

ROE (%) 14.5 21.9 27.3 28.1 20.3 18.7 22.2

ROCE (%) 18.1 28.5 34.9 36.7 26.8 24.9 30.4

Dividend yield (%) 0.0 3.3 3.4 2.6 2.1 2.1 2.3

Source: Company (historical figures), DNB Markets (estimates)

ANALYSTS

Joachim Gunell

Please see the last two pages for

important information. This research

report was not produced in the US.

Analysts employed by non-US

affiliates are not registered/

qualified research analysts with

FINRA in the United States.

DNB Markets | IAR Systems SPONSORED RESEARCH

16 January 2019

2

Overview Valuation (SEK) Valuation methodology

Blending our total peer group of Nordic

software and embedded software

peers with DCF suggests a fair value

of SEK280–350 in our 12-month

perspective (methodology unchanged.)

Our estimates correspond to a 2019e

P/E of 30x, an EV/EBIT of 22x, and an

EV/sales of 7x.

Source: DNB Markets Source: DNB Markets

Downside risks to our fair value DNB Markets estimates Upside risks to our fair value

Failure to resurrect the growth story. If

investors lose trust in its ability to

reinstate growth, it could trigger a

devaluation of the shares, as in 2017.

Disappointing disclosures regarding

key strategic partnerships in terms of

when they will materialise and fee

structure. For instance, the Renesas

Synergy agreement has yet to show

itself in IAR Systems’ sales. Thus, it

would be negative if the Secure

Thingz collaboration did not meet

management expectations.

IAR Systems is highly sensitive to a

strengthening of the SEK (particularly

against the USD, EUR, and JPY).

We believe IAR 3.0 will be when the

market stops seeing IAR Systems as

a compiler supplier and instead starts

to view it as the go-to tools partner for

global players as they position their

embedded systems ahead of the

Internet of Things. We particularly

highlight the market opportunity within

secure embedded systems.

A broad consensus has yet to emerge

on IAR Systems’ investment case;

however, we particularly like the

group’s market opportunity, operating

profile, financial outlook, and

valuation.

The company over-delivering on its

financial targets (particularly for 10–

15% in organic growth)

IAR Systems’ new security offering

gaining faster penetration than we

assume by leveraging on its head-

start.

Value-enhancing acquisitions to be

integrated in its product offering or

new strategic partnerships.

Source: DNB Markets Source: DNB Markets Source: DNB Markets

Sales bridge 2017–2019e (SEKm)

Source: DNB Markets (forecasts), company (historical data)

258

284

350

180

230

280

330

380

430

Nordic software peers Embedded software peers DCF

Fair value range Current share price

345.0

32.1

14.40.0

383.3

67.1

7.20.0

459.1

250.0

300.0

350.0

400.0

450.0

500.0

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16 January 2019

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Q4 preview IAR Systems’ Q4 looks set to have continued the strong trend established in Q2, with our

forecasts suggesting 15% sales growth YOY (organic +8% and FX +7%), equating to sales of

SEK101m and EBIT of SEK31m (EBIT growth of 14% YOY) and corresponding to a margin of

30.4% – down c20bp YOY. Market share gains and focus on large strategic customers are set

to drive sales growth, but we forecast a slight margin contraction YOY due to continued hiring of

software engineers driving an opex step-up (upSEK3m QOQ). We believe investors are willing

to overlook this as long as the growth opportunity, particularly in Secure Thingz, remains on

track. We expect a 2018 DPS of SEK5.00.

Figure 1: DNB Markets Q4 2018 expectations


Key highlights Q4 2018 Q4 2017 DNBe

(SEKm, except per share data) Actual DNB DNB DNB Actual 2018e

Sales 100.9 87.6 383.3

EBIT adjusted 30.7 26.8 118.4

Margin 30.4% 30.6% 30.9%

One-offs 0.0 0.0 0.0

EBIT 30.7 26.8 115.2

Margin 30.4% 30.6% 30.0%

EPS 1.61 1.56 6.76

Growth YOY

Sales grow th 15.2% 3.1% 13.5%

-of w hich organic 8.1% 8.5% 9.3%

-of w hich FX 7.1% -5.4% 4.2%

Divisions Q4 2018 Q4 2017 DNBe

(SEKm) DNB DNB DNB

Sales

Legacy IAR Systems 98.1 86.4 375.0

Royalty-based revenue 1.6 1.2 5.6

Secure Thingz 1.3 0.0 2.7

Group 100.9 87.6 383.3

EBIT adjusted

Legacy IAR Systems + Secure Thingz 29.1 25.6 112.9

Royalty-based revenue 1.6 1.2 5.5

Group 30.7 26.8 118.4

FX impact

Sales 7.1% -5.4% 4.2%

EBIT 18.5% -13.1% 11.5%

Deviation Deviation,


16 January 2019

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Estimate revisions Our 2018–2020 estimates are relatively unchanged and now forecast that IAR Systems should

generate a 2017–2020 EBIT CAGR of 22%, with the true potential beyond our forecast period.

Figure 2: Estimate changes

Source: DNB Markets

(SEKm, except per share data) 2018e 2019e 2020e 2018e 2019e 2020e 2018e 2019e 2020e

Sales

Legacy IAR Systems 382.6 416.7 446.9 375.0 410.5 443.6 -2% -1% -1%

Royalty-based revenue 5.7 17.0 27.0 5.6 16.5 26.5 -2% -3% -2%

Secure Thingz 5.5 31.7 68.7 2.7 32.1 74.2 -50% 1% 8%

Group Total 393.7 465.3 542.5 383.3 459.1 544.2 -3% -1% 0%

EBIT adjusted

Legacy IAR Systems + Secure Thingz 116.0 135.9 176.3 112.9 134.2 174.3 -3% -1% -1%

Royalty-based revenue 5.4 16.2 25.9 5.5 16.0 25.8 1% -1% 0%

Group Total 121.4 152.1 202.2 118.4 150.3 200.1 -2% -1% -1%

EBIT adjusted margin

Legacy IAR Systems + Secure Thingz 29.9% 30.3% 34.2% 29.9% 30.3% 33.7% 0bp 2bp -52bp

Royalty-based revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 0bp 0bp 0bp

Group Total 30.8% 32.7% 37.3% 30.9% 32.7% 36.8% 5bp 4bp -50bp

Organic growth

Legacy IAR Systems 8.8% 7.3% 6.8% 8.9% 7.5% 7.2% 13bp 25bp 45bp

Royalty-based revenue -0.4% 2.7% 2.1% -0.4% 2.7% 2.1% 1bp 0bp -1bp

Secure Thingz 1.5% 6.3% 7.7% 0.8% 7.3% 8.8% -74bp 96bp 106bp

Group Total 9.9% 16.3% 16.6% 9.3% 17.5% 18.1% -60bp 121bp 154bp

Group

Sales 393.7 465.3 542.5 383.3 459.1 544.2 -3% -1% 0%

Sales grow th 14.1% 18.2% 16.6% 13.5% 19.4% 18.2% -64bp 120bp 160bp

Organic 9.9% 16.3% 16.6% 9.3% 17.5% 18.1% -60bp 121bp 154bp

Structure 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0bp 0bp 0bp

Currency 4.2% 1.9% 0.0% 4.2% 1.9% 0.1% -4bp -5bp 7bp

Gross profit 383.8 453.6 528.9 373.5 447.4 530.2 -3% -1% 0%

Margin 97.5% 97.5% 97.5% 97.4% 97.4% 97.4% -6bp -6bp -6bp

EBIT adjusted 121.4 152.1 202.2 118.4 150.3 200.1 -2% -1% -1%

Margin 30.8% 32.7% 37.3% 30.9% 32.7% 36.8% 5bp 4bp -50bp

Adjustments -3.2 0.0 0.0 -3.2 0.0 0.0

EBIT 118.2 152.1 202.2 115.2 150.3 200.1 -3% -1% -1%

Margin 30.0% 32.7% 37.3% 30.0% 32.7% 36.8% 2bp 4bp -50bp

Net f inancial Items -2.8 -2.5 -3.7 -2.8 -2.5 -3.7

Pretax profit 118.6 149.6 198.5 112.4 147.8 196.4 -5% -1% -1%

Tax -22.9 -34.0 -49.5 -24.2 -35.5 -51.1 6% 4% 3%

Tax rate 19.3% 22.7% 24.9% 21.5% 24.0% 26.0% 221bp 130bp 110bp

Net profit 95.8 115.6 149.0 88.2 112.3 145.3 -8% -3% -2%

EPS adjusted 6.57 7.90 10.35 6.76 8.04 10.40 3% 2% 1%

EPS 6.35 7.90 10.35 6.59 8.04 10.40 4% 2% 1%

DPS 5.00 5.50 6.00 5.00 5.00 5.50 0% -9% -8%

Old New Change


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Figure 3: Quarterly estimates by division

Source: DNB Markets (forecasts), company (historical data)

(SEKm, except per share data) Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18e Q1'19e Q2'19e Q3'19e Q4'19e

Sales

Legacy IAR Systems 83.5 85.4 82.9 86.4 87.6 93.8 95.5 98.1 99.8 102.7 103.2 104.9

Royalty-based revenue 2.9 1.4 1.3 1.2 1.3 1.3 1.4 1.6 3.4 4.1 4.0 5.1

Secure Thingz 0.0 0.0 0.0 0.0 0.0 0.5 1.0 1.3 1.7 5.5 9.3 15.6

Group Total 86.4 86.8 84.2 87.6 88.9 95.6 97.9 100.9 104.9 112.3 116.4 125.6

EBIT adjusted

Legacy IAR Systems + Secure Thingz 23.3 24.4 27.3 25.6 28.2 25.6 29.9 29.1 28.7 31.4 32.2 41.5

Royalty-based revenue 2.9 1.4 1.3 1.2 1.3 1.3 1.4 1.6 3.4 4.1 4.0 5.1

Group Total 26.2 25.8 28.6 26.8 29.5 26.9 31.3 30.7 32.1 35.5 36.2 46.5

EBIT adjusted margin

Legacy IAR Systems + Secure Thingz 27.9% 28.6% 32.9% 29.6% 32.2% 27.3% 31.3% 29.7% 28.7% 30.6% 31.2% 39.6%

Royalty-based revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Group Total 30.3% 29.7% 34.0% 30.6% 33.2% 28.1% 32.0% 30.4% 30.6% 31.6% 31.1% 37.1%

Organic growth

Legacy IAR Systems 2.6% 0.6% 8.3% 8.4% 4.9% 7.9% 6.5% 6.4% 7.4% 7.8% 7.8% 7.7%

Royalty-based revenue 0.1% 0.0% 0.1% 0.1% 0.1% 0.1% 0.1% 0.3% 2.1% 2.8% 2.7% 3.3%

Secure Thingz 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 1.4% 1.8% 5.2% 8.5% 13.5%

Group Total 2.7% 0.6% 8.4% 8.5% 5.0% 8.1% 6.7% 8.1% 11.3% 15.9% 18.9% 24.6%

Group

Sales 86.4 86.8 84.2 87.6 88.9 95.6 97.9 100.9 104.9 112.3 116.4 125.6

Sales grow th 7.3% 6.1% 3.8% 3.1% 2.9% 10.1% 16.3% 15.2% 17.9% 17.4% 18.9% 24.4%

Organic 2.7% 0.6% 8.4% 8.5% 5.0% 8.1% 6.7% 8.1% 11.3% 15.9% 18.9% 24.6%

Structure 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Currency 4.6% 5.5% -4.6% -5.4% -2.1% 2.1% 9.6% 7.1% 6.7% 1.6% 0.0% -0.2%

Gross profit 84.0 85.2 82.3 85.0 86.1 93.7 95.8 97.9 101.6 110.0 113.9 121.8

Margin 97.2% 98.2% 97.7% 97.0% 96.9% 98.0% 97.9% 97.0% 96.9% 98.0% 97.9% 97.0%

EBIT adjusted 26.2 25.8 28.6 26.8 29.5 26.9 31.3 30.7 32.1 35.5 36.2 46.5

Margin 30.3% 29.7% 34.0% 30.6% 33.2% 28.1% 32.0% 30.4% 30.6% 31.6% 31.1% 37.1%

Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBIT 26.2 25.8 28.6 26.8 29.5 26.9 31.3 30.7 32.1 35.5 36.2 46.5

Margin 30.3% 29.7% 34.0% 30.6% 33.2% 28.1% 32.0% 30.4% 30.6% 31.6% 31.1% 37.1%

Net f inancial Items -0.8 -0.1 -0.4 -0.4 -0.4 -1.7 -0.3 -0.4 -0.6 -0.9 -0.4 -0.6

Pretax profit 25.4 25.7 28.2 26.4 29.1 22.0 31.0 30.3 31.5 34.6 35.8 45.9

Tax -6.6 -4.5 -7.9 -6.7 -6.3 -5.8 -4.2 -7.9 -7.6 -8.3 -8.6 -11.0

Tax rate 26.0% 17.5% 28.0% 25.4% 21.6% 26.4% 13.5% 26.0% 24.0% 24.0% 24.0% 24.0%

Net profit 18.8 21.2 20.3 19.7 22.8 16.2 26.8 22.4 23.9 26.3 27.2 34.9

EPS adjusted 1.49 1.68 1.61 1.56 1.81 1.43 1.92 1.61 1.71 1.88 1.95 2.50

EPS 1.49 1.67 1.61 1.56 1.81 1.20 1.97 1.61 1.71 1.88 1.95 2.50

DPS 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00

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Figure 4: Peer group (%)

Sales growth GM EBIT margin EBIT growth EPS growth 2017–2020e CAGR

2018e 2019e 2020e 2017 2018e 2019e 2020e xx 2018e 2019e 2020e xx 2018e 2019e 2020e xx Sales EBIT EPS

IAR Systems (DNBe) 13.5 19.4 18.2 97.5 30.9 32.7 36.8 10.2 26.9 33.2 10.3 27.3 29.4 16.4 23.1 22.0

IAR Systems vs. total peer group -3.2 3.8 5.0 25.6 7.0 8.6 11.1 -5.4 -3.2 8.9 -9.0 -7.2 4.4 1.4 1.8 -0.1

Nordic software peers

HMS Networks 14.8 19.4 14.0 61.0 17.9 17.4 19.2 11.3 31.8 21.5 8.9 39.3 22.6 16.0 21.2 22.9

SimCorp 10.4 10.1 8.0 61.4 25.9 26.3 27.5 12.3 15.1 8.5 13.9 16.3 9.9 9.5 11.9 13.3

F-Secure 12.1 15.0 8.1 96.1 6.5 3.5 5.4 -39.5 75.7 66.0 -65.3 113.6 77.6 11.7 20.9 9.6

INVISIO Communications -1.1 29.1 26.0 55.3 22.6 17.0 23.4 -25.7 77.2 46.3 -24.7 80.9 46.0 17.2 24.4 25.8

Fortnox 38.1 28.1 22.8 n.a. 21.9 26.9 30.5 69.5 45.2 34.9 69.2 45.5 38.1 29.5 49.2 50.4

Vitec Software 17.1 5.5 2.3 n.a. 12.5 13.8 15.0 29.0 14.5 6.3 21.9 12.0 8.1 8.1 16.2 13.8

Average of the above 15.2 17.8 13.5 68.4 17.9 17.5 20.2 9.5 43.3 30.6 4.0 51.3 33.7 15.3 24.0 22.6

DNBe vs. peer group -1.8 1.6 4.7 29.1 13.0 15.2 16.6 0.8 -16.3 2.5 6.3 -23.9 -4.3 1.1 -0.9 -0.6

Embedded software peers

Cadence Design Systems 9.0 6.8 7.5 87.8 27.5 29.9 29.9 18.3 7.1 10.0 30.3 7.4 9.9 7.8 11.7 15.4

ANSYS 13.7 9.6 9.5 86.3 46.4 45.2 44.2 10.7 7.4 12.2 32.5 6.1 10.4 10.9 10.1 15.8

Xilinx 17.2 8.6 9.0 70.0 29.4 30.9 30.8 23.5 8.1 14.4 63.4 8.4 12.4 11.6 15.2 25.8

Altium 36.7 25.0 22.9 44.4 28.3 30.3 32.0 46.7 31.9 30.1 43.9 36.4 23.3 28.1 36.0 34.3

Red Hat 15.5 14.9 14.6 85.3 23.9 23.9 24.5 15.3 18.1 16.1 17.7 13.7 16.2 15.0 16.5 15.9

Average of the above 18.4 13.0 12.7 74.8 31.1 32.0 32.3 22.9 14.5 16.6 37.6 14.4 14.5 14.7 17.9 21.4

DNBe vs. peer group -5.0 6.4 5.5 22.8 -0.2 0.7 4.5 -12.7 12.4 16.6 -27.3 12.9 14.9 1.7 5.2 0.6

Average of total peer group 16.7 15.6 13.2 72.0 23.9 24.1 25.7 15.6 30.2 24.2 19.2 34.5 25.0 15.0 21.2 22.1

Median of total peer group 14.8 14.9 9.5 70.0 23.9 26.3 27.5 15.3 18.1 16.1 21.9 16.3 16.2 11.7 16.5 15.9

Source: Factset (16 January 2019) Note (GM = gross margin)

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Figure 5: Peer group (x/%)

M Cap P/E (x) EV/EBITDA (x) EV/EBIT (x) FCF Yield RoE Div. yield Performance (%)

(SEKbn) 2018e 2019e 2020e xx 2018e 2019e 2020e xx 2018e 2019e 2020e 2018e 2018e 2018e -1M -3M -12M

IAR Systems (DNBe) 3.2 36.8 28.9 22.4 22.9 17.5 13.2 27.7 21.3 16.0 -3.3% 30.4% 2.1% 3.0 -0.4 17.9

Premium (+) / discount (-) -17% -9% -12% -14% -13% -18% -14% -11% -15%


HMS Networks 5.6 36.0 25.9 21.1 20.6 16.0 13.2 25.0 18.6 14.9 1.0% 19.2% 1.5% -10.9 -18.5 -9.0

SimCorp 27.1 34.3 29.5 26.8 25.3 22.0 20.1 26.4 22.8 20.9 2.1% 52.2% 1.4% 2.5 -2.7 33.2

F-Secure 4.1 104.8 49.1 27.6 38.7 20.5 13.0 61.4 35.1 20.8 -15.1% 5.6% 1.6% 9.5 -8.6 -38.5

INVISIO Communications 2.6 54.7 30.3 20.7 37.2 20.2 13.5 39.9 22.2 14.8 0.7% 15.9% 1.5% -13.0 -1.0 -29.4

Fortnox 4.3 56.2 38.6 28.0 33.3 23.5 17.4 41.1 27.6 19.8 1.8% 46.7% 0.6% 0.4 0.4 61.1

Vitec Software 2.3 24.1 21.5 19.9 10.4 9.2 8.6 21.6 18.2 16.6 -1.1% 20.3% 1.5% -2.2 2.6 -8.5

Average of the above 51.7 32.5 24.0 27.6 18.6 14.3 35.9 24.1 18.0 -1.8% 26.7% 1.3% -2.3 -4.6 1.5

Premium (+) / discount (-) -29% -11% -7% -17% -6% -8% -23% -12% -11%

Embedded software peers

Cadence Design Systems 115.0 24.8 23.1 21.0 18.7 17.0 13.5 19.8 17.7 15.2 3.8% 39.8% 0.0% 4.7 14.9 0.4

ANSYS 117.7 29.5 27.8 25.2 20.6 18.7 16.2 21.3 19.3 16.8 3.3% 18.1% 0.0% 4.5 0.0 1.5

Altium 207.5 28.0 25.8 23.0 21.7 19.7 16.9 23.6 21.4 18.5 3.7% 31.3% 1.6% 2.6 20.6 22.0

Xilinx 20.0 44.2 35.8 29.0 35.5 27.4 21.6 39.1 29.9 23.4 2.3% 44.7% 1.7% 8.7 7.5 67.4

Red Hat 279.4 50.0 44.0 37.9 32.3 27.3 23.4 36.3 29.9 24.3 3.2% 40.2% 0.0% -0.5 42.1 39.4

Average of the above 35.3 31.3 27.2 25.8 22.0 18.3 28.0 23.6 19.6 3.3% 34.8% 0.6% 4.0 17.0 26.2

Premium (+) / discount (-) 4% -8% -18% -11% -20% -28% -1% -10% -19%

Average of total peer group 44.2 31.9 25.5 26.8 20.1 16.1 32.3 23.9 18.7 0.5% 30.4% 1.0% 0.6 5.2 12.7

Median of total peer group 36.0 29.5 25.2 25.3 20.2 16.2 26.4 22.2 18.5 2.1% 31.3% 1.5% 2.5 0.4 1.5

Source: Factset

Note: Share prices correct as of 17.30.00 CET on 16 January 2019


16 January 2019

8

Valuation Figure 6: IAR Systems EV/EBIT LTM Figure 7: IAR Systems P/E LTM

Source: Factset (underlying data), DNB Markets (further calculations) Source: Factset (underlying data), DNB Markets (further calculations)

Figure 8: Premium/discount EV/EBIT LTM IAR Systems to


Figure 9: Premium/discount EV/EBIT LTM IAR Systems to

embedded software peers

Source: Factset (underlying data), DNB Markets (further calculations) Source: Factset (underlying data), DNB Markets (further calculations)

29.7

25.4

5

10

15

20

25

30

35

36.8

31.4

10

15

20

25

30

35

40

45

50

-9%

1%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-1%-1%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%


16 January 2019

9

Summary of positives World-leading provider of software development tools and services

Sweden-based IAR Systems is a world-leading provider of software tools and services for

embedded systems (a chip containing embedded software) that enable the development of

digital products for 46,000+ customers in end-markets underpinned by growing demand for

digital technology. We believe IAR Systems has a resilient business model selling flexible right-

to-use licences to access its wholly owned software tool-chain (the IAR Embedded Workbench),

which enables close customer relationships, high customer retention, and consistent revenue

streams complemented by a royalty-based agreement with world-leading processor vendor

Renesas Electronics. The March 2018 acquisition of Secure Thingz (the leading provider of

advanced security solutions that help customers to take control of digital products from day one)

has made IAR Systems the frontrunner ahead of the paradigm shift associated with security

solutions for embedded systems in the Internet of Things (IoT).

Embedded resilience in a sticky business

We consider IAR Systems’ key competitive advantage to be its proprietary technology

platform, the IAR Embedded Workbench, which holds a ~50% global market share, as: 1) it is

a unique line-up of a complete tool-chain for product developers; 2) being independent, IAR

Systems supports a wide range of design architecture, meaning customers can choose the

programming environment and tools according to their own needs, regardless of processor or

project, which avoids locking customers in to one technical platform; 3) superior quality as its

commercial customers cannot compromise on tools’ code performance, reliability, user-

friendliness, or time-to-market using inferior technologies such as open-source alternatives; 4)

it is now a leading participant in embedded systems security, and should be able to leverage

its head-start and unique technology to maximise the market potential; and 5) a scaled-up

management team with the ability to execute the growth potential in the business, in our view.

IAR 3.0

IAR Systems has gone through various phases since 2010, having: 1) streamlined itself

towards proprietary software, creating a more specialised company; and 2) shifted its project-

based business model to scalable licence sales, which has substantially improved margins. In

our view, it is now heading into its third phase: the growth story. We believe that IAR 3.0 (our

interpretation of IAR Systems’ next phase) marks the shift from being a supplier of a compiler

to becoming the go-to software tool partner for global names such as Amazon and Renesas

Electronics as they position their embedded systems ahead of the Internet of Things (IoT).

Growing addressable market with the spread of digital technology

The spread of digital technology is driving the market for embedded systems. Thus, the

market has numerous underlying drivers that all indicate a continuation of the solid industry

growth of the past decade. Global Market Insights estimates a 7% market CAGR until 2023e,

and we believe the factors that should affect growth for IAR Systems are likely to be: 1)

continued increase in the number (and complexity) of embedded systems driven by IoT; 2)

demand for reliable and advanced software tools that offer faster time-to-market and a

complete development platform; 3) the automotive opportunity as cars become mobile

computing platforms; 4) market consolidation and participants becoming too dominant; and 5)

untapped potential in security solutions for embedded systems.

Security for embedded systems could mark a paradigm shift for IAR Systems

Following the acquisition of Secure Thingz, IAR Systems is now the frontrunner in offering

secure embedded systems. We believe IAR Systems identified Secure Thingz as a takeover

candidate before the market had valued its demand growth opportunity. The security market

for embedded systems is in its inception phase but we expect it to grow rapidly through 2022e

as the share of secure new embedded products is set to grow from 4% today to almost 20%

by 2022e, according to ABI Research. There are no real competitors in this market yet, and if

IAR Systems were to capture considerable market share, we believe it could be a paradigm

shift for the company. However, to be prudent, we have included minimal sales from its

security offering in our estimates, preferring to see sales materialise.

Its software tools and services enable

the development of digital products…

…in end-markets underpinned by

growing demand for digital technology

IAR Systems owns the market for

software development tools with c50%

global market share

Key competitive strengths:

1) unique and complete tool-chain

2) independence

3) high-quality products

4) frontrunner in security solutions

5) management’s ability to achieve its

long-term potential

Setting the scene for the growth story

Numerous market drivers indicate a

continuation of the solid industry growth

Untapped potential in security offering

16 J

anuary

2019

DN

B M

ark

ets

| IAR

Syste

ms

SP

ON

SO

RE

D R

ES

EA

RC

H

10

Figure 10: IAR Systems’ in one picture

Source: Company (underlying data), DNB Markets (compilation)

Americas 37%*Europe 35%*Asia 28%*

~50% global market share

The complete tool-chain for developers

Product that enables development of digital productsStrong and superiortechnology with 35+years history

Largeand loyalcustomerbase 46,000+Complete C/C++ compiler and debugger toolchainExpanding product portfolio with new technologies

Positioned to benefit from market trends

Increased number of digital products from IoTGrowing complexity of embedded systemsFocus on complet development platforms

Automotive as an increasing marketManagement in-place to fulfil the growth story

Security offering could be a paradigm shift

Secure Thingz is the frontrunner in embedded securitySecurity for IoT devices is at an inflection pointEstimated market CAGR of 38% until 2022eLess than 4% of new IoT devices are secure

Leverage headstart and maximize market share

Ready for the next phase, IAR 3.0

Scalable business model

The scene is set for the growth story

Solid financial profile Superior technology

Licence sales 98%*Royalty sales 2%*Security offering launch Q2 2019

Resilient and sticky business

✓ Sales CAGR of 9% in the past decade

✓Gross margin of 98% in 2017 (88% in 2010)

✓ EBIT margin of 31% in 2017 (7% in 2010)

✓ Asset-light operating model

✓ "one of those negative NWC companies"

Strong financial track record

✓ Renesas Synergy

✓Amazon Web Services

✓ RISC-V

✓ Expess Logic

The go-to-partner to develop IoT platforms

Organic growth of 10-15% annuallyAdj. EBIT margin >25% over a business cycle

Pay-out ratio 30-50%

Financial targets


16 January 2019

11

We forecast 2017–2020e sales and EBIT CAGRs of 16% and 22%

We forecast a 2017–2020 sales CAGR of 16.4% and EBIT CAGR of 22.0% based on a

strong market outlook underpinned by: 1) an increase in the number (and complexity) of

embedded systems; 2) growing demand for reliable and advanced software tools that offer

faster time-to-market and complete development platforms; 3) the automotive opportunity, as

cars become mobile computing platforms; and 4) royalties from Renesas Electronics.

Moreover, we see additional prospects and untapped potential in security solutions for

embedded systems.

This should be driven by an 8.4% organic sales CAGR for its legacy licensing business (98%

of 2017 sales) as the aforementioned market drivers should translate into more processors

and lines of code, driving demand for software development tools and possibly programmers

(user keys) for IAR Systems, as well as a full user-friendly total solution enabling customers to

re-use large amounts of code. In addition, increased penetration from existing and new

technologies in the IAR Embedded Workbench should drive add-on sales.

We estimate that revenues stemming from the royalty-based agreement with Renesas

Electronics (2%) should contribute to a 1.8% organic sales CAGR for IAR Systems until

2020e. However, as the dynamics of this agreement have not been disclosed, we take a

conservative approach for estimating the revenue impact.

We forecast a 2017–2020e EBIT CAGR of 23.5%, implying a margin gain from 31.1% in 2017

to 36.8% in 2020e, driven by: 1) solid organic volume growth; and 2) operational leverage

averaging c70% (hurt in 2018 by the integration of Secure Thingz) in 2019–2020e as we

believe IAR Systems should continue to benefit from economies of scale due to its large fixed

cost base.

Figure 11: Organic sales growth (2010-2020e) Figure 12: Adj. EBIT margin

Source: DNB Markets (forecasts), company (historical data) Source: DNB Markets (forecasts), company (historical data)

Financial targets

IAR Systems has three financial targets: 1) average organic growth of 10–15% annually; 2)

an adj. EBIT margin in excess of 25% over a business cycle; and 3) a dividend payout of 30–

50% of annual net income. Our estimates for organic growth remain below the target for

2018e, but on profitability and the dividend policy, we are above IAR Systems throughout our

forecast period.

26.1%26.5%

13.9%12.0%

8.0%9.0%

5.0%6.0%

9.3%

17.5%18.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

DNB markets' estimates IAR Systems' target

6.7%

12.0%

15.3%15.8%

20.8%

26.8%

30.6%31.1%30.9%32.7%

36.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

DNB Markets' estimates IAR Systems' target

Market drivers should create more

processors and lines of code, driving

demand for software development tools,

and a user-friendly total solution

enabling customers to re-use code

We expect Secure Thingz to contribute

to group sales with 6.5% organic growth

CAGR in 2017–2020e


16 January 2019

12

Figure 13: IAR Systems’ financial targets – reported and DNB Markets' estimates

Reported fiscal years DNB Markets' estimates

2013 2014 2015 2016 2017 IAR target 2018e 2019e 2020e

Organic growth 12.0% 8.0% 9.0% 5.0% 6.0% 10-15% 9.3% 17.5% 18.1%

EBIT margin 15.8% 20.8% 26.8% 30.6% 31.1% >25% 30.0% 32.7% 36.8%

Pay-out ratio 88.0% 149.3% 99.7% 113.3% 79.0% 30-50% 77% 62% 53%

Source: DNB Markets (forecasts), company (historical data and targets)

We calculate a fair value of SEK280–350

Based on our group of Nordic software peers (6), embedded software peers (5), and our DCF

model, we calculate a fair value of SEK280–350. We believe the market has been valuing IAR

Systems relative to Nordic Software peers, whereas in our view embedded software peers

better reflect its operating environment, business model, and growth prospects. On the

current share price, our estimates suggest a 30x 2019e P/E, 22x EV/EBIT, and 7x EV/sales,

while our fair value suggests share price potential of 15–45%.

Figure 14: Valuation summary (SEK/share)

Source: DNB Markets

260

281

350

180

230

280

330

380

430

Nordic software peers Embedded software peers DCF

Fair value range Current share price

Fair value of SEK280–350 suggests

potential of 15–45%


16 January 2019

13

Summary of negatives The key risks that could affect our fair value are: 1) IAR Systems’ inability to resurrect the

growth story, e.g. if it failed to capture the underlying market growth, or if there was prolonged

market consolidation (causing market uncertainty) or delays in key strategic initiatives; 2)

market entry from large and well-resourced participants that until now have overlooked the

potential in software tools for embedded systems; and 3) FX headwinds, as the company is

fairly sensitive to fluctuations in the SEK as it does not hedge its currency flows (with >98% of

sales from markets outside Sweden but 58% of its cost base in SEK).

Failure to resurrect the growth story. Having reported average local currency growth of

20% in 2010–2013, 9% in 2014–2015, and 6% in 2016–2017, we believe the key risk to

the valuation is a failure to resurrect the organic growth story. While we have identified

numerous market drivers that should fuel organic growth in our forecast period, an inability

to capture these trends, delays in when the factors materialise, or disappointing disclosures

regarding the new strategic alliances in royalty fees, licensing structures, etc. could raise

questions about the operations and thus the valuation.

FX headwinds. With >98% of sales from markets outside Sweden, while the vast majority

of the fixed cost base is denominated in SEK (we estimate ~58%), IAR Systems is fairly

sensitive to fluctuations to the SEK. If the SEK were to strengthen by 10% against its most

important currencies (USD, EUR, JPY) as well as the GBP and KRW in 2018, we estimate

a ~10% FX headwind on sales and a ~30% headwind on 2018 EBIT.

Intensified competitive landscape. While the company holds leading positions across

most processor types, it still faces a highly competitive environment, particularly from the

independent supplier Green Hills Software and Arm’s development tool Kiel. If the

competitiveness were to intensify or market growth rates were to abate, there could be

pressure on the pricing of software licences (from those not giving it away free) in efforts to

recapture growth or gain market share. While we believe the commercial viability of open

source names is a limited risk for IAR Systems’ offering today, any success of these

alternatives could result in reduced licensing revenues for IAR Systems.

Continued market consolidation. The ongoing consolidation trend among processor

vendors could last longer than IAR Systems expects. If this continues to create market

uncertainty and disrupt IAR Systems’ partner network, it could hamper its growth prospects.

Moreover, if the acquisitions of embedded software companies continue, it could cap IAR

Systems’ ability to integrate new technologies to its product offering. If it fails to acquire new

technologies or create strategic alliances to integrate into IAR Systems’ offering, this could

impede its ability to address new market trends that should contribute to growth.

Large company entering the market. While we believe the barriers to entry are

considerable, we also believe the attractiveness of this market has been somewhat

overlooked by industry giants as they have often acquired development tools companies

and given away the products ‘free’ to reduce costs. As many competitors in the

semiconductor industry (particularly processor vendors) but especially global giants such

as Google and Amazon are well resourced, it could pose a threat if they were to consider

increasing their presence in software development tools.

Limited supply of qualified personnel. In an industry characterised by rapid

technological development, it is vital for IAR Systems to continually improve its product

offering through innovation. A need for its technology and products to be market-leading

means it has to constantly retain qualified employees, particularly in the technological

aspects of product development. Failure to respond quickly to technological developments

through qualified personnel could hurt its operations.

Worsening economic conditions. A deteriorating global economy would probably cause

a downturn in the cyclical semiconductor industry and customers’ end-markets, which

could affect the number of new microprocessors, and consequently demand for software

development tools that program the chips.


16 January 2019

14

Business overview Dating back to 1983, IAR Systems is an independent provider of software for the

programming of microprocessors in embedded systems (the control function in digital

products). Its leading software – the IAR Embedded Workbench – facilitates, quality-assures,

and improves the time-to-market of programming instructions in processors so they can fulfil

their function in the embedded system for developers of smart products. The customer base

of 150,000+ programmers (users) is found mainly in end-markets underpinned by growing

demand for digital technology and embedded systems, such as industrial automation, medical

technology, telecommunication, consumer electronics, and the automotive industry.

Figure 15: IAR Systems’ role in customers’ product development

Source: Company

Headquartered in Uppsala (Sweden), the company holds a leading global market share of

~50% with 95%+ of sales stemming from markets outside the Nordics and a market presence

in 50+ countries and head count of 163. With a history of adapting to meet customer demand,

IAR Systems’ business model is primarily licence-based, where customers pay for a flexible

right-to-use licence to access the IAR Embedded Workbench®, giving it attractive and steady

revenue streams (~30% recurring revenues). Also, to position itself more towards the Internet

of Things (IoT), the company complemented its licence-based model in 2016 with an

exclusive royalty-based agreement with world-leading process vendor Renesas Electronics.

Licence-based revenue (98% of 2017 sales) based entirely on the number of licence

users (perpetual software keys) of the IAR Embedded Workbench sold when a developer

programs a product. The licence cost is ~SEK30,000 (upfront) while the customer can add

a support and update agreement for an annual cost of 20% of the licence price.

Royalty-based revenue (2%) based on the number of microprocessors produced in

Renesas Synergy series. Unlike the licence-based model, IAR Systems receives revenue

throughout the entire production period.

Figure 16: Geographical sales split (2017) Figure 17: Sales by business model (2017)

Source: Company Source: Company

Before a processor can be used in a product, it needs to be programmed

Product developers use IAR Embedded Workbench to give the processor the correct instructions to control the finished product

Once the processor has been programmed and installed in the finished product, its ready to go to market

1 2 3

USA34%

Other Americas

3%

Japan17%

Other Asia11%

Germany11%

UK4%

Other EMEA16%

Sweden2%

Other Nordics2%

Licence-based98%

Royalty-based2%

World-leading provider of software for

programming processors in embedded

systems, which enable the development

of digital products

50% global market share with 98%

licence-based revenues, which are

flexible for customers and leverage the

number of programmers using its

licence…

…complemented by royalty-based

revenue that leverages the number of

chips used in customers’ production,

which falls straight through to EBIT


16 January 2019

15

IAR Systems was acquired by IT conglomerate Nocom in 2005. However, by 2010 Nocom

(known as Intoi by then) wanted to focus more on proprietary software and create a more

specialised company, so it kept only IAR Systems and took on that name.

With 2017 net sales of SEK345m, IAR Systems is 2.7x larger than the company acquired in

2005. While generating a sales CAGR of 9.2% over the past 10 years, it was able to

significantly boost its underlying profitability from an adj. EBIT margin of 12.3% in 2007 to

31.1% in 2017, which we attribute to: 1) the scalability of its high gross-margin standardised

software; 2) more focus on proprietary products; and 3) increased cost efficiency (given the

large fixed cost base where personnel costs compose 46% of sales).

Figure 18: IAR Systems – sales (SEKm) and adj. EBIT

margin

Figure 19: IAR Systems – sales growth local currencies

Source: Company Source: Company

IAR Systems’ key competitive advantage in our view is its flagship product, the IAR

Embedded Workbench, which is a complete tool-chain for customers. Being independent, the

software supports 12,000+ processors for embedded systems from the major process

vendors with 8-, 16-, and 32-bit architecture, meaning customers can choose the

programming environment and tools according to their own needs regardless of processor or

project, which avoids locking customers in to one technical platform. Moreover, it can re-use

70–80% of previously developed code instead of rewriting it (saving time and resources).

Over the past few years, IAR Systems has expanded its product portfolio and now offers

several adjacent products integrated in the IAR Embedded Workbench to optimise the code

programming, for instance C-STAT and C-RUN (static and dynamic analysis that quality-

assures and strengthens the reliability of the programming), Embedded Trust (security

development environment for IoT solutions) through its acquisition of Secure Thingz, as well

as support for Amazon FreeRTOS (IoT Microcontroller Operating System). In addition to

driving add-on sales, this has – combined with a comprehensive support organisation –

translated into impressive customer retention (95% recurring customers) and strengthened

IAR Systems’ competitiveness. The customer base is very broad as none of the 46,000+

customer organisations accounts for more than 3% of group sales.

Figure 20: IAR Embedded Workbench ® sold to >46,000 customer organisations

Source: Company (information), DNB Markets (graph structuring)

12.3%

2.4%4.0%

6.7%

12.0%

15.3%15.8%

20.8%

26.8%

30.6%31.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

50

100

150

200

250

300

350

400

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sales (L) EBT adj. margin (R)

26.1% 26.5%

13.9%

12.0%

8.0%9.0%

5.0%6.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2010 2011 2012 2013 2014 2015 2016 2017

Sales growth (local currencies)

IDE Tools

- Editor- Project manager- Library Tools

Build Tools

- IAR C/C++ Compiler- Assembler- Linker

C-SPY Debugger

- Simulator driver- Hardware debugging- Power debugging- RTOS plugins

>46,000

From an IT conglomerate to a

streamlined proprietary software

provider….

…with profitable growth, sales CAGR of

9% and adj. EBIT CAGR of 20% in the

past 10 years

Key competitive advantage: cutting-edge

wholly owned technology that maximises

customer benefits offering a complete

solution…

…which combined with complementary

integrated products and comprehensive

support means a loyal customer base

(95% recurring customers)


16 January 2019

16

Forecast changes – P&L

New Old Change

(SEKm) 2018e 2019e 2020e 2018e 2019e 2020e 2018e 2019e 2020e

Revenues 383 459 544 394 465 543 -10 -6 2

Cost of sales -10 -12 -14 -10 -12 -14 0 0 0

Gross profit 374 447 530 384 454 529 -10 -6 1

Operating expenses -234 -265 -289 -241 -270 -286 7 5 -3

EBITDA 140 182 241 143 184 243 -3 -2 -1

EBITDA adj 140 182 241 143 184 243 -3 -2 -1

EBITDA margin (%) 36.4 39.7 44.4 36.3 39.6 44.7 0.1 0.2 -0.4

Depreciation -2 -3 -4 -3 -3 -3 0 0 0

Amortisation -22 -29 -38 -22 -29 -37 0 0 -1

EBIT 115 150 200 118 152 202 -3 -2 -2

EBIT adj 118 150 200 121 152 202 -3 -2 -2

Net financial items -3 -2 -4 -3 -2 -4 0 0 0

PBT 112 148 196 119 150 199 -6 -2 -2

Taxes -24 -35 -51 -23 -34 -50 -1 -2 -2

Minorities 0 0 0 0 0 0 0 0 0

Net profit 88 112 145 96 116 149 -8 -3 -4

Adjustments to net profit -2 0 0 -2 0 0 0 0 0

Net profit adj 86 112 145 93 116 149 -8 -3 -4

Per share data (SEK)

EPS 6.59 8.04 10.40 6.35 7.90 10.35 0.23 0.14 0.05

EPS adj 6.76 8.04 10.40 6.57 7.90 10.35 0.18 0.14 0.05

DPS ordinary 5.00 5.00 5.50 5.00 5.50 6.00 0.00 -0.50 -0.50

DPS 5.00 5.00 5.50 5.00 5.50 6.00 0.00 -0.50 -0.50

Other key metrics (%)

Revenue growth 11.1 19.8 18.5 14.1 18.2 16.6 -3.0 1.6 1.9

EBIT adj growth 10.2 26.9 33.2 13.1 25.3 32.9 -2.8 1.7 0.2

EPS adj growth 6.6 19.0 29.4 3.8 20.2 31.0 2.9 -1.2 -1.6

Avg. number of shares (m) 14 14 14 14 14 14 0 0 0

Capex -38 -52 -67 -38 -52 -65 0 0 -1

OpFCF 101 131 175 104 132 177 -3 -2 -3

Working capital 83 105 149 79 92 126 4 13 22

NIBD adj -108 -115 -150 -103 -104 -128 -5 -10 -22

Source: DNB Markets

Forecast changes – By segment and assumptions

New Old Change

(SEKm) 2018e 2019e 2020e 2018e 2019e 2020e 2018e 2019e 2020e

Assumptions

Revenue org. % YOY 9.30 17.51 18.14 9.91 16.31 16.59 -0.61 1.21 1.54

Structure impact % YOY 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Currency impact % YOY 4.16 1.88 0.07 4.20 1.90 0.00 -0.04 -0.02 0.07

Source: DNB Markets


16 January 2019

17

Quarterly numbers

(SEKm) Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018e Q1 2019e Q2 2019e Q3 2019e Q4 2019e

Revenues 87 84 88 89 96 98 101 105 112 116 126

Cost of sales -2 -2 -3 -3 -2 -2 -3 -3 -2 -2 -4

Gross profit 85 82 85 86 94 96 98 102 110 114 122

Operating expenses -54 -49 -53 -51 -64 -58 -61 -63 -66 -69 -67

EBITDA 31 34 32 35 30 38 37 39 44 45 55

Depreciation -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1

Amortisation -5 -5 -5 -5 -6 -6 -6 -6 -7 -8 -8

EBIT 26 29 27 30 24 31 31 32 35 36 47

Net financial items 0 0 0 0 -2 0 0 -1 -1 0 -1

PBT 26 28 26 29 22 31 30 31 35 36 46

Taxes -5 -8 -7 -6 -6 -4 -8 -8 -8 -9 -11

Minorities 0 0 0 0 0 0 0 0 0 0 0

Net profit 21 20 20 23 16 27 22 24 26 27 35

Adjustments to net profit 0 0 0 0 -2 0 0 0 0 0 0

Net profit adj 21 20 20 23 14 27 22 24 26 27 35

Dividend paid -63 0 0 0 -68 0 0 0 -70 0 0

Avg. number of shares (m) 13 13 13 13 14 14 14 14 14 14 14


EPS 1.67 1.61 1.56 1.81 1.20 1.97 1.61 1.71 1.88 1.95 2.50

EPS adj 1.68 1.61 1.56 1.81 1.43 1.92 1.61 1.71 1.88 1.95 2.50

DPS ordinary 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00

DPS 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00

Growth and margins (%)

Revenues, QOQ growth 0.5 -3.0 4.0 1.5 7.5 2.4 3.1 3.9 7.1 3.7 7.8

Revenues, YOY growth 6.1 3.8 3.1 2.9 10.1 16.3 15.2 17.9 17.4 18.9 24.4

EPS adj, YOY growth 25.4 -6.9 -2.0 21.3 -15.1 19.4 3.0 -5.1 32.0 1.5 55.6

Gross margin 98.2 97.7 97.0 96.9 98.0 97.9 97.0 96.9 98.0 97.9 97.0

EBITDA adj margin 35.6 40.1 36.4 39.0 31.4 38.6 36.7 37.0 38.9 38.4 44.0

Depreciation/revenues -0.7 -0.7 -0.7 -0.6 -0.6 -0.7 -0.7 -0.6 -0.6 -0.7 -0.7

EBIT adj margin 29.7 34.0 30.6 33.2 28.1 32.0 30.4 30.6 31.6 31.1 37.1

Net profit margin 24.4 24.1 22.5 25.6 16.9 27.4 22.2 22.8 23.4 23.4 27.8


Adjustments to quarterly numbers


EBITDA 31 34 32 35 30 38 37 39 44 45 55

EBITDA adj 31 34 32 35 30 38 37 39 44 45 55

EBIT 26 29 27 30 24 31 31 32 35 36 47

Other EBIT adjustments 0 0 0 0 -3 0 0 0 0 0 0

EBIT adj 26 29 27 30 27 31 31 32 35 36 47

Net profit 21 20 20 23 16 27 22 24 26 27 35

Other EBIT adjustments 0 0 0 0 -3 0 0 0 0 0 0

Tax adjustments 0 0 0 0 0 0 0 0 0 0 0

Other adjustments 0 0 0 0 0 0 0 0 0 0 0

Net profit adj 21 20 20 23 14 27 22 24 26 27 35



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Quarterly numbers by segment and assumptions


Assumptions

Revenue org. % YOY 0.61 8.38 8.47 4.98 8.06 6.65 8.09 11.29 15.87 18.93 24.58

Structure impact % YOY 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Currency impact % YOY 5.50 -4.56 -5.41 -2.08 2.07 9.62 7.14 6.66 1.56 0.01 -0.19


Annual P&L

(SEKm) 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Revenues 200 230 236 256 312 328 345 383 459 544

Cost of sales -19 -23 -15 -13 -10 -12 -9 -10 -12 -14

Gross profit 181 207 222 243 301 316 337 374 447 530

Operating expenses -152 -165 -171 -179 -203 -203 -209 -234 -265 -289

EBITDA 29 42 51 64 98 113 127 140 182 241

Depreciation -2 -2 -2 -2 -3 -3 -2 -2 -3 -4

Amortisation -4 -4 -7 -8 -12 -14 -17 -22 -29 -38

EBIT 24 35 41 53 83 97 107 115 150 200

Net financial items 0 0 0 0 0 0 -2 -3 -2 -4

PBT 24 35 37 54 83 100 106 112 148 196

Taxes 3 -22 -12 -11 -20 -22 -26 -24 -35 -51

Effective tax rate (%) -12 63 31 21 24 22 24 22 24 26

Minorities 0 0 0 0 0 0 0 0 0 0

Net profit 27 13 26 42 63 78 80 88 112 145

Adjustments to net profit 0 0 3 0 0 -3 0 -2 0 0

Net profit adj 27 13 29 42 63 75 80 86 112 145

Dividend paid 0 -11 -23 0 -63 -88 -63 -68 -70 -77

Avg. number of shares 11 11 12 13 13 13 13 14 14 14


EPS 2.44 1.14 2.10 3.34 5.02 6.18 6.33 6.59 8.04 10.40

EPS adj 2.44 1.14 2.10 3.34 5.02 6.18 6.33 6.76 8.04 10.40

DPS ordinary 0.00 0.98 1.85 0.00 5.00 7.00 5.00 5.00 5.00 5.50

DPS 0.00 0.98 1.85 0.00 5.00 7.00 5.00 5.00 5.00 5.50

Growth and margins (%)

Revenue growth 12.6 14.8 2.7 8.3 21.9 5.4 5.1 11.1 19.8 18.5

EPS adj growth 126.9 -53.2 83.4 59.2 50.2 23.0 2.6 6.6 19.0 29.4

Gross margin 90.5 89.9 93.9 95.0 96.7 96.3 97.5 97.4 97.4 97.4

EBITDA margin 14.7 18.2 21.4 24.9 31.5 34.5 36.9 36.4 39.7 44.4

EBITDA adj margin 14.7 18.2 21.4 24.9 31.5 34.5 36.9 36.4 39.7 44.4

Depreciation/revenues -0.8 -1.0 -0.9 -0.9 -0.8 -0.8 -0.7 -0.7 -0.7 -0.7

EBIT margin 12.0 15.3 17.5 20.8 26.8 29.4 31.1 30.0 32.7 36.8

EBIT adj margin 12.0 15.3 15.8 20.8 26.8 30.6 31.1 30.9 32.7 36.8

PBT margin 12.0 15.3 15.8 21.0 26.7 30.5 30.6 29.3 32.2 36.1

Net profit margin 13.5 5.6 11.0 16.5 20.3 23.8 23.2 23.0 24.5 26.7



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Adjustments to annual P&L

(SEKm) 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

EBITDA 29 42 51 64 98 113 127 140 182 241

EBITDA adj 29 42 51 64 98 113 127 140 182 241

EBIT 24 35 41 53 83 97 107 115 150 200

Other EBIT adjustments 0 0 4 0 0 -4 0 -3 0 0

EBIT adj 24 35 37 53 83 101 107 118 150 200

Net profit 27 13 26 42 63 78 80 88 112 145

Other EBIT adjustments 0 0 4 0 0 -4 0 -3 0 0

Tax adjustments 0 0 0 0 0 0 0 0 0 0

Other adjustments 0 0 0 0 0 0 0 0 0 0

Net profit adj 27 13 29 42 63 75 80 86 112 145


EPS 2.44 1.14 2.10 3.34 5.02 6.18 6.33 6.59 8.04 10.40

Recommended adjustment 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.17 0.00 0.00

EPS adj 2.44 1.14 2.10 3.34 5.02 6.18 6.33 6.76 8.04 10.40


Cash flow

(SEKm) 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Net profit 27 13 26 42 63 78 80 88 112 145

Depreciation and amortisation 5 7 9 10 15 17 20 24 32 41

Cash flow from operations (CFO) 35 38 41 70 99 114 124 100 129 178

Capital expenditure -11 -22 -21 -32 -19 -19 -19 -38 -52 -67

Acquisitions/Investments -15 0 0 0 0 0 0 0 0 0

Divestments 0 0 0 0 1 0 0 0 0 0

Cash flow from investing (CFI) -26 -18 -19 -32 -18 -19 -38 -208 -52 -67

Free cash flow (FCF) 9 20 22 39 80 95 86 -108 77 112

Net change in debt 7 0 0 0 0 0 0 0 0 0

Dividends paid 0 -11 -23 0 -63 -88 -63 -68 -70 -77

Share issue (repurchase) 0 0 22 -53 0 0 0 175 0 0

Other 1 12 12 0 0 0 0 2 0 0

Cash flow from financing (CFF) 8 1 12 -53 -64 -88 -63 110 -70 -77

Total cash flow (CFO+CFI+CFF) 17 21 33 -15 17 7 23 1 7 35

FCFF calculation

Free cash flow 9 20 22 39 80 95 86 -108 77 112

Less: tax shields/other 0 0 0 0 0 0 0 0 0 0

Less: acquisitions 15 0 0 0 0 0 0 0 0 0

Less: divestments 0 0 0 0 -1 0 0 0 0 0

Growth (%)

CFO 152.2 10.1 6.3 72.7 40.4 15.7 8.5 -19.0 28.6 38.3

CFI -105.6 30.1 -5.5 -66.0 42.3 -3.3 -98.9 -454.2 75.1 -28.3

FCF 641.7 127.0 6.9 78.7 108.3 18.5 -9.4 -225.2 171.3 44.9

CFF 348.4 -92.2 1866.7 -550.8 -19.5 -39.0 28.5 273.3 -163.8 -10.0

FCFF nm nm nm nm nm nm nm nm nm nm



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Balance sheet

(SEKm) 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Assets 309 324 370 375 399 396 410 746 788 858

Inventories 5 4 3 4 5 6 5 6 8 9

Trade receivables 32 29 34 39 44 48 51 58 72 81

Other receivables 11 14 15 11 20 19 12 47 47 47

Current financial assets 7 3 1 0 0 0 0 0 0 0

Cash and cash equivalents 30 49 82 71 89 99 120 111 118 153

Current assets 85 98 135 124 158 172 187 222 245 290

Property, plant and equipment 6 6 6 8 7 6 6 10 16 25

Other intangible assets 139 152 164 186 192 197 194 503 516 532

Defferred tax assets 74 62 59 51 37 16 3 10 10 10

Non-current financial assets 6 5 5 6 5 5 20 2 2 2

Non-current assets 224 226 235 251 241 224 223 524 544 569

Total assets 309 324 370 375 399 396 410 746 788 858

Equity and liabilities 309 324 370 375 399 396 410 746 788 858

Total equity 241 254 295 289 291 280 290 579 621 690

Trade payables 11 6 6 5 5 5 6 8 8 10

Other payables and accruals 52 53 54 65 84 92 96 129 129 129

Short-term debt 1 1 1 1 1 1 1 1 1 1

Total current liabilities 63 61 61 71 90 99 102 139 139 141

Long-term debt 2 1 1 2 1 2 2 2 2 2

Deferred tax liabilities 4 9 13 15 17 15 14 25 25 25

Other non-current liabilities 0 0 0 0 1 1 2 2 2 2

Total non-current liabilities 5 10 14 16 18 18 17 28 28 28

Total liabilities 68 70 75 87 108 116 120 167 167 169

Total equity and liabilities 309 324 370 375 399 396 410 746 788 858

Key metrics

Net interest bearing debt -28 -47 -79 -68 -88 -97 -117 -108 -115 -150



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Valuation ratios

(SEKm) 2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Enterprise value

Share price (SEK) 39.77 74.75 150.00 206.00 189.00 243.00 240.50 240.50

Number of shares (m) 11.05 11.36 12.34 12.63 12.63 12.63 12.63 13.97 13.97 13.97

Market capitalisation 491 944 1,895 2,602 2,387 3,394 3,359 3,359

Net interest bearing debt -28 -47 -79 -68 -88 -97 -117 -108 -115 -150

Adjustments to NIBD 0 0 0 0 0 0 0 0 0 0

Net interest bearing debt adj -28 -47 -79 -68 -88 -97 -117 -108 -115 -150

EV 411 876 1,807 2,505 2,270 3,287 3,244 3,210

EV adj 411 876 1,807 2,505 2,270 3,287 3,244 3,210

Valuation

EPS 2.44 1.14 2.10 3.34 5.02 6.18 6.33 6.59 8.04 10.40

EPS adj 2.44 1.14 2.10 3.34 5.02 6.18 6.33 6.76 8.04 10.40

DPS ordinary 0.00 0.98 1.85 0.00 5.00 7.00 5.00 5.00 5.00 5.50

DPS 0.00 0.98 1.85 0.00 5.00 7.00 5.00 5.00 5.00 5.50

P/E 18.9 22.4 29.9 33.4 29.8 36.9 29.9 23.1

P/E adj 18.9 22.4 29.9 33.4 29.8 36.0 29.9 23.1

P/B 1.66 3.27 6.51 9.31 8.22 5.87 5.41 4.87

Average ROE 6.4% 5.3% 9.4% 14.5% 21.9% 27.3% 28.1% 20.3% 18.7% 22.2%

Earnings yield adj 5.3% 4.5% 3.3% 3.0% 3.4% 2.8% 3.3% 4.3%

Dividend yield 4.6% 0.0% 3.3% 3.4% 2.6% 2.1% 2.1% 2.3%

Free cash flow yield 4.4% 4.1% 4.2% 3.7% 3.6% -3.2% 2.3% 3.3%

EV/SALES 1.74 3.42 5.80 7.63 6.58 8.57 7.07 5.90

EV/SALES adj 1.74 3.42 5.80 7.63 6.58 8.57 7.07 5.90

EV/EBITDA 8.1 13.8 18.4 22.1 17.8 23.5 17.8 13.3

EV/EBITDA adj 8.1 13.8 18.4 22.1 17.8 23.5 17.8 13.3

EV/EBIT 10.0 16.5 21.7 26.0 21.1 28.5 21.6 16.0

EV/EBIT adj 11.0 16.5 21.7 24.9 21.1 27.8 21.6 16.0

EV/capital employed 1.4 3.0 6.2 8.9 7.5 5.7 5.2 4.6

EV/NOPLAT 13.5 22.2 29.3 35.1 28.6 38.6 29.2 21.7

EV/OpFCF (taxed) 20.8 50.1 31.6 36.6 28.3 46.7 35.5 26.1



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Key accounting ratios

2011 2012 2013 2014 2015 2016 2017 2018e 2019e 2020e

Profitability (%)

ROA 5.1 4.1 7.5 11.3 16.4 19.6 19.9 15.3 14.6 17.7

ROCE 5.2 14.0 13.4 18.1 28.5 34.9 36.7 26.8 24.9 30.4

ROCE after tax 3.8 10.4 9.9 13.4 21.1 25.8 27.2 19.8 18.4 22.5

Return on invested capital (%)

Net PPE/revenues 2.9 2.7 2.6 3.1 2.1 1.9 1.8 2.6 3.6 4.6

Working capital/revenues 10.9 16.4 31.2 20.9 22.0 22.4 24.6 21.5 22.9 27.3

Cash flow ratios (%)

FCF/revenues 4.4 8.8 9.1 15.1 25.8 29.0 25.0 -28.2 16.8 20.5

FCF/market capitalisation 4.4 4.1 4.2 3.7 3.6 -3.2 2.3 3.3

CFO/revenues 17.4 16.6 17.2 27.5 31.7 34.8 35.9 26.2 28.1 32.8

CFO/market capitalisation 8.3 7.4 5.2 4.4 5.2 3.0 3.8 5.3

CFO/capex 316.4 171.0 192.9 217.6 508.8 614.0 652.1 261.3 248.7 268.0

CFO/current liabilities 55.4 63.3 66.8 99.4 110.2 115.8 121.1 72.1 92.6 126.5

Cash conversion ratio 33.0 155.4 83.4 91.5 126.8 122.2 107.9 -122.5 68.7 76.9

Capex/revenues 5.5 9.7 8.9 12.6 6.2 5.7 5.5 10.0 11.3 12.2

Capex/depreciation 647.1 973.9 959.1 1404.3 776.0 744.0 791.7 1539.3 1727.4 1868.2

OpFCF margin 9.2 8.4 12.5 12.2 25.3 28.8 31.4 26.4 28.4 32.1

Total payout ratio 0.0 85.4 88.0 0.0 99.7 113.3 79.0 75.9 62.2 52.9

Leverage and solvency (x)

Net debt/EBITDA -0.94 -1.12 -1.57 -1.08 -0.89 -0.85 -0.92 -0.77 -0.63 -0.62

Total debt/total capital (BV) 0.01 0.01 0.01 0.01 0.00 0.01 0.01 0.00 0.00 0.00

LTD / (LTD + equity (MV)) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Cash conversion cycle

Inventory turnover days 88.4 61.1 83.1 104.7 180.7 167.5 223.3 241.3 246.1 229.8

Receivables turnover days 79.2 67.7 75.3 70.9 74.5 74.7 66.2 99.7 94.5 85.9

Credit period 205.6 95.6 143.5 147.1 170.1 158.6 244.8 311.9 262.8 265.3

Cash conversion cycle -38.0 33.3 14.8 28.5 85.1 83.7 44.8 29.0 77.8 50.4



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Important Information

This report has been prepared by DNB Markets, a division of DNB Bank ASA. DNB Bank ASA is a part of the DNB Group. This report is based on information obtained from

public sources that DNB Markets believes to be reliable but which DNB Markets has not independently verified, and DNB Markets makes no guarantee, representation or

warranty as to its accuracy or completeness. This report does not, and does not attempt to, contain everything material which there is to be said about the Company. Any

opinions expressed herein reflect DNB Markets’ judgement at the time the report was prepared and are subject to change without notice. The report is planned updated

minimum every quarter.

Any use of non-DNB logos in this report is solely for the purpose of assisting in identifying the relevant issuer. DNB is not affiliated with any such issuer.

This report is for clients only, and not for publication, and has been prepared for information purposes only by DNB Markets, a division of DNB Bank ASA. This report is the property of DNB Markets. DNB Markets retains all intellectual property rights (including, but not limited to, copyright) relating to the report. Sell-side investment firms are not allowed any commercial use (including, but not limited to, reproduction and redistribution) of the report contents, either partially or in full, without DNB Markets’ explicit and prior written consent. However, buy-side investment firms may use the report when making investment decisions, and may also base investment advice given to clients on the report. Such use is dependent on the buy-side investment firm citing DNB Markets as the source.

Conflict of interest

This report has been commissioned and paid for by the company, and is deemed to constitute an acceptable minor non-monetary benefit as defined in MiFID II.

Company: IAR Systems

Coverage by Analyst: Joachim Gunell

Date: 16/01/2019

This report has been commissioned and paid for by the Company. DNB Markets has provided investment services and/or ancillary services to the company and received compensation for it during the past 12 months. DNB Markets has been lead or co-lead manager related to an Investment Banking assignment for the company and received compensation for it during the past 12 months.

Readers should assume that DNB Markets may currently or may in the coming three months and beyond be providing or seeking

to provide confidential investment banking services or other services to the company/companies

Share positions in the company: Analyst* Employees** DNB*** Update

Number of shares 0 660 0 16/01/2019

*The analyst or any close associates. **Share positions include people involved in the production of credit and equity research,

including people that could reasonably be expected to have access to it before distribution.

***Share positions as part of DNB Group. Holdings as part of DNB Markets investment services activity are not included.

Recommendation distribution and corporate clients for the last 12 months

Buy Hold Sell No_rec Total

Number 144 67 20 8 239

% of total 60% 28% 8% 3%

DNB Markets client 25% 8% 2% 1% 86


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Legal statement These materials constitute research as defined in section 9-27 (1) of the Norwegian Securities Trading Regulations (Norwegian: verdipapirforskriften), and are not investment advice as defined in section 2-4(1) of the Norwegian securities trading act (Norwegian verdipapirhandelloven). It constitutes an acceptable minor non-monetary benefit as defined in MiFID II.

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In Brazil The analyst or any close associates do not hold nor do they have any direct/indirect involvement in the acquisition, sale, or intermediation of the securities discussed herein. Any financial interests, not disclosed above, that the analyst or any close associates holds in the issuer discussed in the report is limited to investment funds that do not


16 January 2019

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mainly invest in the issuer or industry discussed in the report and the management of which these persons cannot influence.

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